EUR 40.00 For Business Accounts Only

Pakistan Fertilizer: Earnings revised up; Market-weight maintained

• We are revising up our earnings forecasts for Pak Fertilizers by 5-61% (excluding FFBL) over 2020-2022 on the back of (1) higher-than-expected Urea offtake during 10M2020, (2) impact of Gas Infrastructure Development Cess (GIDC) review petition and (3) review of Sept-2020 detailed accounts.
• Urea offtake beating expectations: We revisit our Urea offtake for 2020, wherein we now expect Urea offtake to clock in at 5.8mn tons, in line with last five years average offtake vs. our earlier estimate of 5.5mn tons. To note, previously we had trimmed our Urea offtake on expectations of supply side disruptions amidst COVID-19 outbreak and impact of locust attack.
• 48 monthly installments instead of 24 for GIDC payment: The Supreme Court of Pakistan has dismissed review petitions on Gas Infrastructure Development Cess (GIDC). However, as per the verdict, all fertilizer companies can now pay their outstanding amounts in 48 equal monthly installments instead of 24 monthly installments earlier.
• To highlight, all companies have already accounted for GIDC in their accounts except for EFERT’s on its Enven Plant, for which the company has taken a stay order from the Sindh High Court. We have also not taken impact of EFERT's Enven plant in our model. 
• We maintain our Buy ratings on Fauji Fertilizer (FFC) and Engro Corporation (ENGRO), Hold on Engro Fertilizer (EFERT) and upgrade Fauji Fertilizer Bin Qasim (FFBL) to a Hold from Sell earlier. We have a Market-weight stance on the sector.
• Fauji Fertilizer Company (FFC): We revise up our earnings forecasts for FFC by 28% for 2020 primarily due to increase in our Urea offtake estimate by 8% from 2.3mn tons to 2.5mn tons for 2020. We also revise up our 2021-2022 earnings given that the Supreme Court has allowed GIDC payment over 48 monthly installments instead of 24.
• Engro Fertilizers Limited (EFERT): We revise up our earnings forecasts for EFERT by 8-61% for 2020-2022 on the back (1) revision in our Urea offtake estimate for 2020 from 1.7mn tons to 2.0mn tons, (2) one-time tax reversal of Rs2,117mn (EPS impact Rs1.6) in 3Q2020 and (3) incorporating the impact of GIDC review petition.
• Engro Corporation Limited (ENGRO): We revise up our EPS forecasts for ENGRO by 5-28% for 2020-2022. Revision is attributed to (1) upward revision in earnings estimate for EFERT due to the above mentioned reasons and (2) increase in earnings estimate for Engro Polymer & Chemicals (EPCL) amidst higher-than-expected PVC-Ethylene margins and better-than-expected 9M2020 earnings. Please refer to our recent report on EPCL titled ‘Earnings revised up, Buy maintained’ dated ‘Nov 17, 2020’ for more details.
• Fauji Fertilizer Bin Qasim (FFBL): We revise up our earnings forecasts for FFBL for 2020 from a LPS of Rs1.63 to an EPS of Rs1.7. The turnaround is primarily on the back of (1) higher than expected DAP offtake (+37% YoY in 10M2020), (2) higher than expected margins on DAP, (3) above expected dividend from FFBL power company and (4) lower effective tax rate at 16%.

We also revise up our 2021-2022 earnings mainly due to (1) injection of new equity via right shares of Rs5bn and (2) incorporating the impact of GIDC review petition (savings of Rs0.23/share).